Mark Koscinski Uncategorized

Budgets and the Smaller NFP Organization (Part 2)

Budgets and the Smaller NFP Organization (Part 2)

In a previous blog, we reviewed how important mindset was to the budgeting process of smaller NFP organizations. If the budget is viewed as a chore, the end product will often not be worth the paper it is written on. (Did I just give away my age with that reference?) We saw how even the categorization of expenditures ( capex, opex, riskex and stratex) influences how the budgeting process is perceived. Ultimately, effective budgeting ties into the vision and mission of the organization. 

Here are some additional tips about making the budgeting process more effective: 

  1. Avoid cost allocations as much as possible when budgeting.  Yes, all fixed costs must be covered. There is no question about that. However, allocations of those costs often lead to incorrect decisions. Look for “cost drivers” rather than allocating expenses across a client base. Cost drivers in the NFP industry will be the subject of a future blog. 
  2. Look towards developing client cost computations in addition to  program costing.  A typical NFP program will measure the cost of a program being provided rather than looking at the total cost of a particular client. Some clients are more cost intensive than others. Should particular clients be directed to other agencies or NFP entities for service? It is difficult to be all things to all people.  More on this when we examine cost drivers in the future. 
  3. Don’t forget to tie the budget into the strategic plan. The  budget should be prepared with one eye on daily operations and one eye on the strategic plan.  Many strategic plans are completed and then simply forgotten about.  They often contain operating projections for three to five years.  Each annual budget is an integral part of the strategic plan, and the current year budget should be the first year of financial projections in the operating budget.  By doing this the organization is forced to revisit its strategic plan at least annually.. 
  4. Get into the habit of forecasting frequently.  First let’s differentiate between budgeting and forecasting.  For our purposes, budgeting is the process of planning activities and expenditures for the year.  Forecasting is the periodic updating of the budget. One criticism of budgeting is it becomes outdated quickly. Frequent forecasting alleviates this problem.  Again, we are talking about a mindset.  Forecasting can be done quickly if one only deals with the major items in the budget. Timely and more accurate forecasting produces information management can use to run the organization, 
  5. The budgeting system should produce and measure key performance indicators (KPIs). At the end of the day, the budgeting system should produce a small number of KPIs. These KPI’s will be part of the balanced scorecard management will be judged on. Additional information about balanced scorecards is available on this website. 

I know this and the previous discussion have been a just a survey of budgeting issues.  If you want to discuss how to improve and automate your budgeting process, please don’t hesitate to contact me!

Mark Koscinski Uncategorized

Budgets and Smaller NFP Organizations (Part 1)

With  many Not-For-Profit entities (“NFPs”) using a June 30 year end, the budget cycle for the new fiscal year has already begun. The budgeting process can be a very painful ordeal for many smaller NFPs, causing much groaning, complaining, and the gnashing of teeth.  The most common complaints are  budget preparation  takes too long and the budget  is quickly out of date shortly after it has been  published. 

There are many reasons why an organization needs to budget.  I won’t address them here as you can pick up any accounting or management textbook and get those answers. Nevertheless,  budgeting can be a significant contributor to the success of the organization. In this  and a future blog,  I want to make some suggestions  that  might make the budgeting process more informative and potentially less difficult.  

Let’s begin with the mindset management needs when it begins budgeting. There are generally three ways an annual budget can be built:

  • Incremental budgeting.  This is the lazy method of budgeting.  You start with last year’s actual results and adjust for anticipated changes  such as the inflation rate, the addition of personnel, etc. While this can be the quickest way to get a budget, it is also the most ineffective. Incremental budgeting has many problems, including the potential omission of expenditures and necessary additions of new line items simply because they did not occur in the prior year.  As such, they can be easily missed. Secondly, incremental budgeting can build in inefficiencies since it uses the prior year actual data as its starting point.  Inefficient or even unnecessary expenditures made in the year just closed are simply carried forward to the current year’s budget, sometimes with insufficient analysis being done to see if the expenditures were required. 
  • Zero based budgeting (“ZBB”). This method of budgeting is the polar opposite of incremental budgeting.  Incremental budgeting begins with last year’s actual expenditures and makes adjustments for the current year. It accepts last year’s actual results as the base for the current year’s budget. ZBB assumes NO expenditures as the starting point for the budget.  The department or person proposing an expenditure must support the request for it  with good reasons since the budget for that item is presumed to be zero in the upcoming year. While ZBB is a theoretically correct way to budget, it can be extremely time consuming as all expenditures need to be supported. 
  • Value proposition budgeting. My favorite style of budgeting, as it is a Golden Mean between incremental budgeting and ZBB. In value proposition budgeting, each expenditure from the prior year and any new expenditures are scrutinized to see if it and the amount are  necessary to achieve the vision and mission of the organization.  Any expenditure not necessary to attain the entity’s objectives is eliminated.  This method keeps everyone’s eyes on the vision and mission of the organization and reminds everyone why the doors are opened every morning. It aligns the budgeting process and its results with the organization’s vision and mission. 

In line with the use of value proposition budgeting, the categorization of budgeted expenditures can also achieve the same purpose. One common way to classify expenditures is this:

  • Capex. I am sure we have all heard of Capex, or capital expenditures.  These are expenditures for items such as equipment that will last over a period of years.  
  • Opex.  These are operational expenditures required to keep the organization running on a day to day basis. These include personnel expenses, rent, utilities, etc. 
  • Riskex. Expenditures  reducing risks to the employees, clients, and operations of the organization. Examples of these include insurance expenditures and alterations to the working environment to eliminate potentially hazardous working conditions.
  • Stratex. Expenditures required to achieve the mission of the organization. These could be ongoing, annual expenditures or expenditures for new programs.  

Thinking of expenditures in this manner also focuses management on the vision and the mission of the organization, particularly when riskex and stratex expenditures are being evaluated.  Management is forced to ask what expenditures are needed to achieve the organization’s objectives.  In the next instalment of this blog, I will continue to explore how good budgeting is truly mission-critical.